Q3 2020 Leggett & Platt Inc Earnings Call

Greetings and welcome to the like it implies third quarter 2020 conference call. At this time all participants are in a listen only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance. During the conference. Please press star zero on your telephone keypad as a reminder, this conference is being.

Accorded it is now my pleasure to introduce your host Susan Mccoy Senior Vice President of Investor Relations. Thank you you may begin.

Good morning, and thank you for taking part in.

Third quarter conference call.

We are conducting the call from different locations again this quarter. Please.

Bear with us if you experience minor delays or mixed audio quality.

On the call today are Karl Glassman, Chairman and CEO, Mr., Douglas President and C. Oh Oh.

Okay, Executive Vice President and CFO.

Steve Anderson E V P unprecedented other specialized products and furniture boring and technical products segments Kashi brands Gmbh senior director of IR and tear Sherwood director IR.

The agenda for our call. This morning is as follows Karl will start with a summary of the main points, we made in yesterday's press release.

Rich will discuss operating results and Jeff will cover financial details.

This conference call is being recorded for Leggett <unk> Platt and is copyrighted material. This.

This call may not be transcribed recorded or rebroadcast without our expressed permission a replay is available from the IR portion of what gets website.

We posted to the Investor relations portion of the website Yesterdays press release and the set of Powerpoint slides that contain summary financial information.

Along with segment details those.

Those documents supplement the information we discuss on the call.

Including non-GAAP reconciliations.

I need to remind you that remarks today concerning future expectations events objectives strategies trends or results constitute forward looking statements.

Actual results or events may differ materially due to a number of risks and uncertainties and the company undertakes no obligation to update or revise these statements.

For a summary of these risk factors and additional information. Please refer to yesterday's press release and the section in our most recent 10-K and subsequent 10-Q entitled risk factors and forward looking statements I'll now turn the call over to Carl.

Good morning, and thank you for joining us today.

First and foremost I would like to thank our employees for their continued commitment to keeping each other safe and healthy while serving our customers. We are pleased to deliver strong third quarter results. In these uncertain times and this could not have happened without the dedication and hard work of our people.

As we reported yesterday third quarter earnings per share were a quarterly record of 77 cents. This included $6 million or restructuring charges incurred primarily from pandemic related cost reductions.

Third quarter 2019 E. P. S was 74 cents and included two cents per share of restructuring related charges fixed.

Excluding these items third quarter adjusted earnings of 80 cents were up four cents from adjusted 2019, a third quarter earnings.

Third quarter, EBITDA was a quarterly record $147 million.

EBIT increased in the quarter versus third quarter last year, primarily due to lower fixed cost, partially offset by lower volume and a change in LIFO impact EBITDA.

EBIT margin increased 60 basis points to 12.2%, while adjusted EBIT margin increased 80 basis points to 12.7% and adjusted EBITDA margins increased 80 basis points to 16.6%.

Third quarter sales were $1.208 billion down 3% versus third quarter of 2019.

Continued strong demand in residential end markets was more than offset by weaknesses in aerospace in work furniture.

Operating cash flow in the quarter was a record $261 million adjusted working capital as a percent of annualized sales for the quarter improved to a notable 8.7% versus 10.7% in the third quarter of 2019.

As we were also reported yesterday, our board of directors declared a 40 cents per share fourth quarter dividend.

At an annual dividend of <unk> dollar 60 per share we have increased our annual dividend for 49 consecutive years, we remain committed to our position as a dividend aristocrat.

At the end of October we received positive news related to the U.S. mattress industries anti dumping petition on mattress importers from seven countries, including Vietnam, Indonesia and Cambodia.

Department of Commerce made a preliminary determination that mattresses were being sold at prices that violate the U.S. trade laws and impose preliminary duties that range from 3% to 990%.

Also in the quarter the department of Commerce impose preliminary countervailing duties of 98% on China.

We anticipate final determinations in these investigations in 2020 21 likely during the second quarter.

This should allow domestic matters producers to compete on a more level playing field.

The company remains well positioned both competitively and financially to capitalize on long term opportunities in various end markets are enduring long term fundamentals give us confidence in our ability to continue to create value for our shareholders I'll now turn the call over to match.

Thank you Carl and good morning to everyone.

As we discussed last quarter, our operational priorities for the third quarter included increasing production to meet strong bedding demand.

Echoing widespread labor shortages, especially in the U.S.

Managing supply chain issues associated with a global shortage of nonwoven fabric stemming from a surge in demand for medical P.P.E. applications received.

Responding to evolving government restrictions on production capacity in various parts of the world.

And moderate monitoring changes in demand signals in responding rapidly to control cost and optimize cash flow.

While challenges remain in most of these areas, we continue to make headway and we'll provide more detail as we discuss each segment.

Sales in our bedding products segment were down 2% in the third quarter strong demand throughout the quarter in the bedding market drove sales growth in E. C. S U S spraying and your European Spring this.

This growth was more than offset by lower volume in adjustable bed and exited volume in fashion bed and drawn wire.

We continue to increase production, while managing supply challenges with non woven fabrics and labor shortages.

We found some alternative well non woven fabrics, but they are less efficient and constrained breeder production and our higher cost.

We also incurred significant additional costs to airfreight nonwoven materials in an effort to better meet demand.

And our U.S. spring business staffing is above pre cobot levels, and we continue adding employees in response to strong demand.

During the quarter. We also began to face supply constraints on T.D.I. chemical used in the production of phones.

Producers of T.D. I declared force majeure at significantly reduced supply of the chemical.

Well the supply constraints have relaxed to a degree we expect to see reduced supply through at least the end of the year.

Within the last month, we have also seen shortages syrup shortages of Polyols and MDR chemical more widely used at our specialty films.

Producers had pointed to equipment outages at hurricanes in the Gulf as well as raw material availability as impediments to production.

We anticipate a tight supply of these chemicals through mid 2021.

Our supply chains have also been hampered by congested ports, especially on the west coast of the U.S.

We're working diligently to address these issues and increased production. So that we can better be growing levels of market demand.

Sales in our specialized product segment were down 9% in the third quarter, primarily from weak demand in aerospace and hydraulic cylinders.

We expect demand in aerospace to be challenge over the next few years, given the disruption that air travel and resulting buildup of aircraft and supply chain inventories.

In our automotive business sales for the quarter were roughly flat as demand trends continue to improve throughout the quarter.

We are currently operating at near pre cobot capacity levels in all regions.

Sales in our furniture flooring and textiles product segment were up 1% in the third quarter driven by continued strong demand in fabric converting geo textile components at home furniture.

[noise] recovery in work furniture continues to lag the other businesses in the segment as the industry has have been heavily impacted by the effects of the pandemic.

In flooring products residential sales held up well, but hospitality sales have been weak due to disruptions in the travel industry.

Across our businesses, we continue to focus on controlling costs by keeping our variable cost structure aligned with current demand levels and maintaining as much fixed cost savings as practical.

The six fixed cost actions, we took earlier in the year reduced our third quarter costs by approximately $30 million and we expect full year fixed cost savings of nearly a $100 million.

In the last few weeks COVID-19 infections again began to search across much of North America, and Europe, reinforcing that we remain in an uncertain economic environment.

Our first priority is to keep our employees safe and healthy and I'm pleased that the safety protocols. Our team has developed and implemented are working very well.

We cannot control the impacts of broad based community spread however.

We continue to closely monitor government orders and demand signals across our market and stand ready to rapidly respond to control costs and optimize cash flow should economic conditions decline.

For now well continue to do all that we can to bridge supply and demand gaps, particularly in our bedding business.

I want to thank our employees for their dedication ingenuity and resilience. Your actions are the key to our success and your efforts to overcome the many challenges that have developed this year are greatly appreciate it.

I'll now turn the call over to Jeff.

Thank you Mitch and good morning, everyone.

Throughout the third quarter, our primary financial focus has been on maximizing liquidity generating cash and disciplined uses of cash.

As previously mentioned cash from operations was a record $261 million in the third quarter.

An increase of $48 million versus the same quarter last year, primarily due to working capital improvements.

We ended the quarter with adjusted working capital as a percentage of annualized sales at 8.7% and outstanding result, reflecting our continued priority on closely controlling all elements of working capital.

Our balance sheet remains strong and we ended the quarter with total liquidity of $1.4 billion.

Comprised of $245 million in cash on hand, and $1.2 billion in available capacity under the $1.2 billion revolving credit facility.

In the quarter, we reduced debt by $173 million, including a $60 million prepayment of a portion of our term loan aid.

As of September Thirtyth, our net debt to trailing 12 month EBITDA was 2.74 times.

An improvement over second quarter 3.1 times.

As it relates to the tax rate the company benefited from new tax guidance issued in the third quarter related to global intangible low tax income, commonly referred to as guilty G.I.L.T.I., which.

Which lowered our adjusted tax rate to approximately 18%.

These newly issued regulations reduced the amount of tax in certain situations, where companies are paying high rate the foreign tax.

The changes were retroactively applied to the beginning of 2018 when the guilty rules were first put in place.

From a use of cash perspective, we continue to deploy our cash in a balanced and disciplined manner.

We expect our capital expenditures to approximate $70 million for the year dividends should require approximately $210 million for the full year.

Oh scheduled debt repayment for the remainder of the year or approximately $12 million and we continue to limit our acquisition activity.

In summary, we are committed to maintaining our long held financial strength and investment grade debt ratings.

This discipline along with the hard work and dedication of all of our employees allows us to withstand these uncertain times and capture long term opportunities.

With those comments I'll turn the call back over to Susan.

That concludes our prepared remarks, we thank you for your attention and well be glad to answer your question Carl director acute session as the group answers your questions Jessie we're ready to begin the Q and a session.

Ladies and gentlemen, if he would like to ask a question at this time. Please press star one on your telephone keypad the confirmation tone in the corporate line is in the question queue.

May press Star two if he would like to move your question from the queue for participants using speaker equipment. It may be necessary to pick up your handset before pressing the star keys.

Our first question comes from the line of Susan Maklari with Goldman Sachs. Please proceed with your question.

Thank you good morning, everyone.

My first question is just you know I know that you gave us a little bit more color on some of the constraints that you're facing in the bedding supply chains, there and I guess, just I think a little bit deeper into that can you give us some sense of you know the efforts that you are taking across some of those different areas and nonwovens the chemicals.

How you're thinking you know looking out about some of that alleviating I know that you mentioned that it should kind of be a pressure through the through the second quarter of next year, but what are some of the things that could help you to kind of maybe get ahead of that a little bit earlier than that.

As we kind of look out.

Mitch you want to take it.

I'm sure Carl Thanks, Hi, Susan [laughter].

Yeah, we're doing quite a lot to be honest with you. So there's a number of factors that that are at play really the the primary issue is the lack of nonwoven material availability I just been redirected to medical ppt applications.

We went from having a handful that sort of top tier nonwovens suppliers in the U.S. to completely redoing our supply chain to have to after you find alternative types of material that we can run as I mentioned those types of that material is typically less efficient and have to slow down our machines turn.

Got it so it does constrain our supply, but we've added are gone from four or five suppliers too you know.

Oh, a pretty large number across the across the globe, We mentioned that we air freighted product to get it here to help meet demand. So we really are doing everything that we can to try to overcome those hurdles, but it remains a challenge and will continue to be a challenge as long as the primary spend on nonwoven product that that we.

Really like to use is redirected.

In addition, we're doing are doing all we can to add more labor I mentioned that were a head of our pre cobot staffing levels. We continue to do to ramp up our staffing in an effort to get to four shifts in all our major facilities. They run 24, seven but is it is it.

Challenge to find to find that labor, but we are making headway big chemical.

[laughter] shortages, there's been forced me share declared on T.I.M.D. I'd, probably all Oh fairly recently, you know who we are.

We're basically a continued to search and bring it all the chemical that we can find but they're simply not a lot of available ability out there. The teams work on formulations and doing all that they can take to conserve them.

We're also adding additional equipment to produce our comfort core products and we expect that to start coming in early next year and.

And continue to expect to be able to continue to increase our production, but there's no sort of magic wand that gives us an overnight tremendous impact.

Okay. That's very helpful color Mitch. Thank you and then you know following up can you talk a little bit about pricing you know obviously.

Finally, given a lot of these headwinds that you're facing how are you thinking about offsetting some of those as well as some of the inflation that we are seeing an underlying input cost just talk about your efforts there and how that's coming together.

Okay. Thanks, So yeah, we have been you know that the impacts on the nonwoven pricing is so significant we have had to pass those on to our customers continue to work with them to try and reach a fair outcome. There. The same thing on chemical costs, if they said they've been.

Increasing we have been successful in passing those along.

Okay. Thank you guys and good luck with everything.

Thank you Susan.

Thank you. Our next question comes from Bobby Griffin with Raymond James. Please proceed with your question.

Good morning body. Thank you for taking my questions I hope, everyone, staying safe and healthy.

Yeah, Hey, Bobby speaking with you.

I guess, Mitch maybe just circle back first on Susan's question can you, maybe just help us put into context kind of the progression of the bedding production and supply constraints over the quarter versus the July commentary of sales up 1% and fully understand three weeks of commentary not afford 13 week quarter, but.

Did the did the fabric and wogan supply constraints get worse throughout the quarter and that offset the gains you made and labor and stuff like that or any any additional color to kind of help us understand the puts and takes of why the quarter ended up maybe down in sales were starting up when the industry, probably at least got a little better throughout the quarter at least from.

Pure betting perspective.

[noise], Yeah, sure bodied and you got it pretty close to right there so.

So a couple of things to for that finished goods inventory standpoint, there at the end of September we are well less than half of what our finished goods inventory would have been in January or March so where you're basically shipping what we're producing at this point, so that obviously impacts sales from a sort of year over year and.

A normal year perspective, you you are right that even as we ramped.

Ramped up our our head count from you know taking it really down deep you know during the March and April timeframe and continued to make gains. There. This that the quarter was also the worst impact for us on the availability of non wovens as we had sort of last minute, what we thought so.

Why that we could count on diverted from us and so that absolutely did impact our production.

We're still in difficult times, but getting a little bit more you know <unk> inventory that is having less impact on our production from a non woven standpoint from just availability, but still less efficient as we are having to run.

Needle punch instead of Sun Spartan bond in many many areas. So from a sequential standpoint, we still continue to to make gains throughout the quarter, but when we look year over year I'm, particularly in September we were down a bit.

Okay, and then maybe to put it in like I understand we don't talk about pure unit numbers, but just to put in context or something is is the amount of innersprings. You can produce today in October you know better than September August or anything around that to help us think about kind of the improvement and if you want to have you can you can you give us something as a as a.

Compared to last year is it running 90% of production versus last year or 85% something like that.

[noise] <unk> <unk> I think that we're probably probably pretty close to where we were last year with a lot more hours and a lot more.

Okay.

Okay, and then to pivot off that clearly some inefficiencies and start running through the piano that way with more hours and over time, you know that the air Freighting things and what's still record level S and record level EBIT in the quarter. So we if we were to think out when things get back to more normal.

So the legacy enterprise earn more money earned more EBIT on 2019 sales, we got back to the prior peak in sales would earn a higher operating income than it had before given you know these fixed cost reductions could be permanent.

Is that the right way to think about all this.

Just for context or help us bridging work 2021 could be like.

Hey, Hey, Bobby.

Oh, yes, yes, yes.

Go ahead Susan.

Okay. Bobby I was just going to just reinforce our long term margin target is still alive and then they have to 12.5%. We appreciate how strong our margins were this quarter that they they we believe that great quarter, pushing close to 13% spent about since we've seen that level performance, but we're not.

Changing that long term I'm not going to have to 12.5% prefer our target based upon this quarter's performance.

Okay, Bobby Bobby with with that said, though and I do agree with what Susan said, but.

Based on the efficiencies that we've been able to develop an exhibit from a cost reduction perspective, that's primarily in bodied and overhead we expect the cost efficiency to be sustainable. So the basic the answer to your question is.

[laughter].

On the same amount of volume in 2019 extrapolate that this is not a guidance. It's just an example, and 2021 based on today's cost structure and the ability to move our book belief of our ability to maintain that cost efficiency going forward will you as a result be more.

Profitable and the answer is without question, yes, So said differently, while we haven't changed our long term targets. We would certainly have every expectation to run on the high end of those targets going forward. Then we'll dig you know more deeply into that as we develop guidance for 2021.

Yeah, that's very helpful. Carl you split it a lot better than I think I asked the questions. That's it. Thank you [laughter] breaches.

That's exactly what I was looking for I appreciate the details I'll jump back into queue. Thank you.

Thanks Bye bye.

Thank you. Our next question comes from Keith Hughes The Truest Securities. Please proceed with your question.

Oh. Thank you a couple of questions first your specialty sales were up as you noted in the slides given some of these fortunate you're on various chemicals is growth going to deteriorate there in the fourth quarter as a result.

As a result.

No actually occurred.

[laughter].

Oh Boy Mitch It will do you want to handle a it's to be determined based on chemical availability, it's gonna be tight, but Mitch do you want to elaborate.

Yeah, I think that's the best way to add.

Answer it Carl we are on you know allocation or under all of all those chemicals are fortunate as your yeah. There's been a number of issues that have popped up from mechanical issues to availability of raw materials to hurricanes and tropical storms that have all impacted these things.

So you know we're.

I think we're getting by but it's but it's tight and it's hard to predict how long those will last so I think at this point, yeah wouldn't be I wouldn't put a negative spread on the fourth quarter, but it's got to be tight.

Okay, and if we switch over to home furniture was up 4% quarter. That's another area, where we've heard kind of surge in sales.

There were there are operational issues, there or production issues there or.

Where do you think you stand versus market growth.

[laughter] Yeah, one why don't I start and then Steve if you want to pile on that remember if you look at the whole segment of FF and T. Good through the first three weeks of July. We told you that sales were up 7% and then they ended up being 1% and I don't want anyone to think that's our.

Call on home furniture, and that home furniture was up strongly in early July because in 2020, the home furniture producers in the United States produced as opposed to taking their normal.

Always the fourth of July week can sometimes two weeks of July. So the comp was you know exceeded significantly home furniture demand subsequent to those first three weeks of the quarter continued to be strong our customers have been somewhat impacted.

Good bye labor availability issues. So if we go to a lesser to degree they have been impacted by the T.D.I. issue that was most acute in September that Mitch made reference to so I furniture demand is strong.

We have we are very comfortable with our market share position and the position that the industry holds said differently, there's a backlog and home furniture that is consistent with the backlog and Betty So all is well in home furniture.

But Steve I jumped in front of you.

That's how I think he said virtually what I would say you know we've had some labor constraints in China in the U.S. and the quarter, which are gradually improving so we ended the quarter with a backlog as did most of the downstream players on the supply chain.

On that on Sercel demand, we're pushing down into Q4.

And on top of that orders increase through the through the quarter you know.

Adding to that so we're starting to see demand strong.

Through the through the first quarter of next year and probably into the second quarter and as companies are placing their orders out further and further.

They get some some clarity and that's the upside and then on the other side the seating business in the U.S. is running at about 90% of the pre told at levels due to depressed sleeper cell, so demand, which is primarily driven by the hospitality industry slowdown.

And we are making all that our customers can take in that space as well.

Okay. Thank you.

Thank you Keith.

Thank you. Our next question comes from Robert freed now with Piper Sandler. Please proceed with your question.

Hi, good morning, everybody and Oh young for I'm here this morning.

I wanted to first ask about trends in the auto business. They could see a stabilization or versus Q2 I'm. Just kinda are you seeing a steady sequential month over month improvement in auto related sales still and looking ahead.

Do you have any visibility into auto dealers inventory replenishment.

Current inventory levels are appeared to be sitting at multiyear lows. Thanks [noise].

Steve you want to take that.

Yeah for sure good morning.

First I have to say were really really proud of the automotive teams for the diligent efforts you know to keep our customers running Uh huh.

Done that and auto Weve seen a significant monthly growth from May through September we.

We expect that to take time off some in the last two months of the Irrs the holidays impact the calendar.

We don't have real time visibility into OEM inventories, but we do know there at very low levels and U.S. in China, and I try to rebuild them too to normal levels, and that's particularly true for trucks and as she leaves so in North America or September inventory ended at about.

2.6 million units are only 49 days of supply, which is down significantly from the normal range.

And in China, We've now seen five consecutive months of year over year sales growth, which is pulling on those inventories and that's due partially due to government incentives and these will drive the higher production into the first half of 2021 again, particularly in China, and North America, where the sales have been strong.

But eventually the normalized sales levels, you know will not support these production levels that we've seen in Q3 and Q4, Yeah. We will come back to you know a normalized.

Production to sales ratio.

I appreciate that these on that and then just as a second question I was giving the supply.

Okay and can change you're seeing across different categories. I'm wondering if you could touch on just that you know the feedback you're hearing from customers and do you see any longer term risk, perhaps with customers looking to diversify their suppliers. So you know just given the some of the bottleneck sung.

Yeah. Bobby this is Carl I'll take a swing at it and then ask Mitch to chime in that.

The the supply chain issues, the nonwoven challenges that Mitch spoke of the.

The labor constraints they are not like it only issues <unk>. It is a global issue demand in Europe is extremely strong. So there is no spring manufacture anywhere in the world that has excess capacity. So yes, our customers are working diligently to try to fill gaps.

It's very very difficult for them to do that and there is no spring manufacturer globally that can recover through these short term issues as well as like it we have the best machinery available in the World. We're backward Lee integrated we have strong IP. So there's.

There's you know people trying to kind of fill gaps, which we respect but from a long term perspective, we're not concerned. This is a temporary set of circumstances that our people are doing herculean.

Task of recovering from and we'll get ahead of this thing.

And I'm I'm not long term concern that nobody can handle these issues better than like it.

Mitch I don't I think Scott I appreciate it.

HM.

Thank you we have no additional questions at this time, so I'd like to pass the floor back to management for any additional closing comments.

We'll just say thank you for joining the call today and well talk to you.

Corridor.

Ladies and gentlemen, this does conclude today's teleconference and webcast. We thank you for your participation and you may disconnect. Your lines at this time.

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